Traveling abroad is exciting, yet few college students get to have this experience, simply because they didn’t know how to make it an affordable and accessible option. While most students want to go abroad and learn while being immersed in another culture, the staggering cost is a huge obstacle to spending time studying abroad and gaining life experience.
Don’t let the cost discourage you- there may be a tax-free way to study abroad and have the adventures and experiences you will remember for life, so keep reading!
What Is A 529 Plan?
529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
A 529 plan is a tax-advantaged savings plan designed to encourage and reward people who save for future college expenses. The 529 plan college-savings accounts programs are also regulated by the Internal Revenue Service. Because 529 plans are specifically designated for higher education, they also provide tax benefits.
Distributions taken from a 529 plan are allocated between principal and earnings on a pro-rata basis, which means that every withdrawal includes an earnings portion. As a result, there are enforced limitations on 529 plan qualified expenses.
The SEC provides that there are two types of 529 plans: pre-paid tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities also sponsor a pre-paid tuition plan.
Because 529 Plans are state-sponsored college savings accounts, the rules determining plan use and fund withdrawal capabilities can vary, so it is of the utmost importance to speak to your 529 plan provider for information on plan withdrawal terms and conditions.
Also, interest rates (the main reason for a 529 plan) significantly vary by fund, so research your options before selecting your funds. You should also budget a monthly contribution to fund your 529 plan.
Benefits Of A 529 Plan
There are many benefits to participating in your state’s 529 plan. However, with those benefits come restrictions, since qualified withdrawals are strictly limited to specified higher-education expenditures.
When you invest in a 529 account, the savings grow significantly faster than your average savings account. This is the main benefit of a 529 that makes the cost of studying abroad much more manageable than a traditional savings account.
How A 529 Can Be Used To Help College Students Study Abroad
Most (but not all) study-abroad program expenses can be funded through withdrawals from a 529 account. 529 distributions are tax-free if they are used to pay for qualified higher education expenses at a college or university that is eligible for Title IV higher federal education aid.
These higher education institutions will have a federal school code that can be listed on the Free Application for Federal Student Aid (FAFSA). There are more than 100 foreign colleges that are eligible for federal student aid.
You can use 529 plan funds to pay for study abroad expenses if the study program at the foreign institution is eligible for credit at the student's US home institution, and if the foreign institution is eligible for Title IV federal student aid, which can be determined by looking for the federal school code.
In simple terms, your school has to give credit for the study abroad program, and the foreign college where you will be studying abroad must be eligible for financial aid.
For more details about the types of study abroad programs, compare the reviews sorted by country, program and duration to see how they can benefit your education. By creating a budget and savings plan for your international studies, you will be able to quickly fund your 529 plan and meet your goal.
Learn how to start saving with a 529 plan and watch your account grow.
What Expenses Can a 529 Be Used To Pay When Studying Abroad?
Qualified Expenses for enrollment or attendance at the institution normally fall into one of these three main categories:
1. Tuition, Fees, Books, Supplies, and Equipment
The majority of study-abroad expenses consist of tuition, fees and approved room-and-board expenses, which are eligible to be funded through withdrawals from a 529 plan college-savings account. Required textbooks and supplies (which can get expensive really fast!) are also covered.
2. Room and Board
Room and board includes the costs of rent (whether living on or off-campus), and food. The expenses must be less than or equal to the room and board allowance from the college’s cost of attendance figures (or the actual amount charged by the school if the student is living on campus) in order to be considered as qualified expenses. Also, the student must have at least half-time enrollment status to qualify, regardless of whether or not they live on campus.
The IRS requires that for room-and-board expenses to qualify for 529 withdrawals, they must be a direct educational expense. If you take a vacation while studying abroad and stay at another location, that room and board expense will not qualify.
3. Computers, Peripheral Equipment, Computer Software, and Internet Access Charges
Previously, the school had to specifically require computers, peripheral equipment, software and Internet access in order to consider these as qualified expenses. With recent changes observing the necessity for technological equipment in education, they are all considered qualified expenses.
What Can A 529 Not Be Used To Pay?
While the definition of a ‘qualified expense’ appears to be all-inclusive, there are many expenses that are not covered as a qualified expense. In fact, many people mistakenly claim some of these expenses only to find that they are not qualified expenses, which can result in unexpected tax penalties.
Travel: Costs to commute to and from school do not qualify. Surprisingly, gas, airfare, and bus fare are all excluded from transportation costs. A word of caution- if you go on weekend trips or spring-break trips not related to educational activities away from your study abroad campus, those expenses will not be covered.
Sports and Activity Fees: Expenses for extracurricular activities such as sports and recreational activities cannot be reimbursed from a 529 account. Interestingly enough, even if the beneficiary has a sports scholarship, the expenses related to sports activities still cannot be paid from a 529 account.
Student loans: A 529 account cannot be use to pay back student loans.
Certain Electronics: While computers and software are now allowed as a qualified expense, other electronics traditionally used for entertainment, such as theater equipment are projectors are not qualified expenses (unless the items are specifically required by the school for enrollment or attendance).
Insurance: Medical expenses and health insurance premium do not qualify. Neither are international healthcare costs or, not unsurprisingly, foreign transaction fees. Such ineligible expenses need to be figured into the overall cost of the trip.
Important Information about the American Opportunity Tax Credit (AOTC) or Lifetime Learning Credit – Expenses used to qualify for the AOTC or Lifetime Learning Credit must be excluded from qualified expenses.
When Penalties Apply
Non-qualified withdrawals are subject to income tax as well as a 10 percent penalty on the earnings portion of the withdrawal, which is why it is important to be sure you attend an IRS-eligible educational institution, the expenses qualify, and you are enrolled at minimum as a half time student. There are rare exceptions to withdrawing without penalty, such as veteran’s assistance, attending a U.S. military academy, disability, or death.
First, be sure that the expenses are qualified expenses from an eligible educational institution. Next, make sure that a qualifying person incurred the expenses when the expenses were incurred.
The qualified expenses need to be incurred by the student in connection to attendance or enrollment at a university. While the parent may pay the actual bill, the debt itself must belong to the student.
Withdrawals taken from a 529 plan must also be taken in the same calendar year that the qualified expenses are paid.
If someone else pays your expenses and you reimburse them, you are still able to make a withdrawal from your 529 plan. The withdrawal will generate a 1099 to you as the account owner, and you will need to trace the withdrawal back to the expense.
You Can Use Your 529 To Study Abroad If You Follow The Rules
While most people dream about studying abroad and experiencing life outside of the country, the high price tag associated with tuition and room and board fees prevents most students from applying to study abroad. Fortunately, the 529 plan gives you hope by allowing students save money on qualified expenses, and qualified expenses are the majority of the cost of studying abroad. Do your research to get a clear understanding of how much it will cost so you can work towards your goal.
Key Points To Remember
- The 529 distribution must be used to pay for qualified higher education expenses.
- The educational institution must be eligible for at the student’s US home institution.
- The foreign college must be Title IV federal student aid.
- The student must at least be enrolled as a half time student.
- When used properly, the 529 plan alleviates the burden of this expensive (yet worthwhile) experience!
- Tell us your plans for how you will use your 529 plan to study abroad in the comments below!
When used properly, the 529 plan alleviates the burden of this expensive (yet worthwhile) experience!
Tell us your plans for how you will use your 529 plan to study abroad in the comments below!
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.
Wow, this post is hugely informative! I’d heard of 529 plans, but had never thought about maximizing that investment to make study-abroad dreams a reality! Pretty sure I could find a legit education experience in every weekend trip so the funds could be legally used on travel too 🙂
Just remember the actual travel portion doesn’t qualify.
I am still unclear as to whether or not one can use accumulated 529 savings for direct overseas tuition. For example, if a student wishes to study at Kansas Gaidai in Japan as a typical 4-year student (not as an exchange student from a U.S. or European college), could that be done without penalty?
The school needs to be listed on the Federal School Code List here to be eligible to pay tuition directly to from your 529 plan without penalty: https://ifap.ed.gov/ifap/fedSchoolCodeList.jsp (I did a quick search and didn’t see the school you mention).
Robert,
My daughter will be studying for 4 years in Canada, the school is on the FAFSA list. That school will not accept funds directly from the 529 sponsor. Can the money be sent to my daughter’s Canadian Bank account?
Yes, just keep accurate records.
My daughter’s study abroad program includes an International Program Fee that includes a standard fee for airfare as well as other fees for required for school sponsored educational experiences. Can I use a 529 withdrawal to pay for that fee. It is charged to the student on the student’s account? Do I need to reduce the expense by the portion of the fee that covers airfare?
If the fee is itemized, you should exclude any non-qualifying expenses. If it’s not itemized, and since the fee is required, you can probably count the entire expense.
So my daughters college is arranging a study abroad overseas for 3 weeks. I have an estimated itemized invoice. So the travel (flight) from us to Europe and back is non qualified? I understand about the travel while over there. Thanks
Nope – not qualified. No different than traveling to and from school within the US.
My daughter is studying for 4 months in London. I used her 529 money to pay for her room and program as it is through her university. It does not include a meal plan! So that’s lots of meals out! Can I use her 529 to cover what I would spend on her meal plan when not abroad? What would be the best way to keep track, she is using a credit card with her name on it that I pay, it’s also my husbands credit card.
You can use the lesser of:
– The amount allowed for room and board on the financial aid cost of attendance for (COA)
– The actual amount spent
Most people go over, so they have to use the amount allowed on the COA.
Our granddaughter is a student at Virginia Tech and wants to participate in a study abroad semester this fall through I ES. She has been told by counselors at Virginia Tech that the credits will transfer as electives back to Virginia tech. However, since I ES is not an educational institution it does not participate in the US Department of Education student aid programs. Tuition is paid through IES. Would this tuition be eligible for our 529 fund use?
Tuition payments would have to be made to an eligible institution to qualify. It sounds like you already know that it’s not a qualifying institution, so the answer would be no.
My daughter was accepted into a Canadian college. It is not an eligible college but a”deferment only”. We are willing to pull out our 529 to pay for it. There is no penalty for that, but we would have to pay taxes. How much would we pay in taxes?
It would be taxed at your ordinary income rate plus a 10% penalty. That can get expensive quick if you’re a high earner. With the penalty and state taxes, you could be pushing 50%.
I appreciate your response. It is a California fund, but now we live in Virginia. I was hoping to pay no more than 20%. I am not a high earner. I looks like we’ll be paying taxes on the earnings portion of 529 only. What is a 10% penalty about? The college fund itself is not going to charge us any penalty, but on their site it says that we’ll pay 10% federal (is that the same thing?), income taxes and 2.5% on earnings portion in California.
My family lives outside the US, although we’re US citizens. My daughter plans to attend college in Europe. Can we use the 529 plan we’ve been contributing to for 8 years for tuition, etc. there? She won’t technically be in a “study abroad” program.
If the college is on the list of qualifying schools, then yes. Otherwise, no.
My daughter is going to do a Semester at Sea (offered through Colorado State University). The cost of the program is $25,000 for college credits, room and board. She has a scholarship at University of Alabama that can be applied to her study abroad of $15,000. Which leaves $10,000 – can this be a qualified withdrawal from her 529?
Yes, since this is offered for credit through an accredited institution it is qualifying.
Is there any special way to be sure to transfer to the right amount of money to a Canadian University when they set the price in Canadian dollars, but the 529 funds (Virginia) are in US dollars?
First, I would ask them for a bill in USD. If they can’t do that, ask how they want you to pay. Pay them (ACH, credit card, etc), and then withdraw that exact amount from your 529 plan.
My daughter is studying in Germany for a year through her Cal. State University. The COA at her home University has a transportation allowance. Can I use this number for 529 reimbursement for her German train Pass going from her student apartment to her German school (a city bus pass)? This is not travel for vacation between cities or for airfare, but for local transportation.
Even though transportation is listed on the COA for the home school, it’s not a qualifying expense at home or abroad. Here’s a good guide for this: https://thecollegeinvestor.com/18450/qualified-expenses-529-plan/
My daughters are doing a faculty lead study abroad over spring break. They already have room & board and fees with the university for the semester. Am I able to to use the 529 plan for the room & board and fees associated with the study abroad? What about airfare?
If it’s paid through your accredited school, and it’s covered by the COA, then yes, you can consider it qualifying. No on the airfare.
If a school is not listed on the Federal School Code (https://ifap.ed.gov/ifap/fedSchoolCodeList.jsp). Can we ask them to sign them up? Is there a process for that?
You can ask them, but they usually have to go through an accreditation process that takes time and money. I’m not an expert here in accreditation, but I believe it takes a few years at best.
My daughter is doing study abroad and I was told that airfare is treated as a qualified expense, the same way out-of-state travel is viewed. Meaning that even if someone has to drive 8 hours within the same state for college, this “in-state” travel would not be a qualified expense, but out-of-state travel is. And that travel from US to abroad location and return would be qualified/treated the same way as out-of-state travel.
Travel is not a qualified expense. The example you provided is not qualified either (there is no difference between out of state, in state, cross-town, public transport, whatever).
Some schools on the International Schools in Federal Loan Programs list are marked as “Deferment Only”. Can 529 money be used at those institutions without penalty?
Eligible means that U.S. students may borrow money through the U.S. federal student aid programs administered by the U.S. Department of Education (the Department) while enrolled in an eligible program
at an eligible foreign university or college. “Deferment Only” means that U.S. students may defer making payments on existing federal student loan accounts while enrolled in an eligible program at a deferment only foreign university or college, but may not take out federal student loans for enrollment at the deferment-only foreign university or college.
My Penn Stater son will study at University of South Wales in Sydney for Spring 2019 semester. We paid $427.64 USD for a student visa that allows him to study in Australia from January through May. Is this an eligible expense?
No, a student visa would not be considered eligible.
Hi! This is so informative !!! Thank you !
Quick question: My daughter wants to study Medicine in the Philippines. Are there any universities/colleges that qualify for her 529 ? I mean…. I couldn’t find federal code for medical schools/universities in the Philippines? Kindly help.
Thank you again
If you couldn’t find any, chances are no.
Thank you ! Is there any way we can use the 529 if my daughter enrolls in Medicine in the Philippines?
Thank you ! Is there any way we can use the 529 if my daughter enrolls in Medicine in the Philippines?
Thank you !!
You can always use it, you will just pay taxes and penalties on the amount withdrawn if you use it at a non-qualifying institution.
Thank you Robert. What would be other ways my daughter could use this without us accruing any kind of penalty?
What do you mean by “surprisingly, gas, bus fare and airfare are excluded from transportation costs”?
Does this mean that they can be paid from a 529 or not?
They are NOT qualifying expenses.
The American Opportunity Credit requires the federal ID number to qualify. My son is studying in Australia at an US Education accepted institute. I paid his tuition to a 3rd party in the US who I had to go through since it is a year long study abroad program. The 3rd party gave me their EIN for the tax form but I don”t know if this is correct. Did they tell me the correct instructions? The foreign school and the 3rd party I paid are not required to file a 1098T form but the tuition is a qualified expense. I want to claim the education credit which we are qualified for except I don’t have the school EIN. What to do?
If they are on the Federal school code list, they should have an EIN to provide. Are they on this list: https://ifap.ed.gov/ifap/fedSchoolCodeList.jsp
If so, I’d trust the information they provided as they know best.
The Australian U is on the list but they do not have a EIN. The administration company I pay is not an institute of higher learning (only a middle man that arranges oversea details like payment, grades transfer, etc) but they have an EIN. I was thinking of putting both the University and the 3rd party on the 1098T form which asks for the name of the institute, and use the University address in Australia. I have to believe I am not the only one who has run into this gray area with overseas schools and the American Opportunity credit.
I believe you should fill it out exactly as the 1098-T states, since that is what was transmitted to the IRS.
Sorry, there was never a 1098T issued since neither the University nor the 3rd party have to. TurboTax actually is filling out an 1098T in place of an official one, so the IRS would not see one to compare.
Weird, I’d contact the company and ask.
My daughter has been studying in England for the last 4 years at an IRS eligible institution, University of Newcastle. She maxed out the funds in her 529 in 2016. I transferred funds from her younger sister to the daughter in England’s 529 as the younger one had an excess in her 529. This year I am finding issues in filing 2018 taxes. Turbo tax is asking for an EIN for University of Newcastle. I never had to supply this in the past but it is almost like it is not recognizing foreign tuition and room and board as legitimate expenses. Turbotax is telling me that I am taking out more more money from my 529 than I have in qualified expenses as it is showing total withdrawal from 2 1099 Qs but only recognizing 1 1098 T. How do I get an EIN for the University of Newcastle? Is there any way to resolve this issue? i know for a fact this was not a problem in 2016
You’re the second one asking. Do you have an EIN on the 1098 T?
My son is a student at a state university (UNC), and studied abroad in the fall of 2018. I paid the study abroad costs to UNC in 2018 directly from my son’s 529 plan. When I received the 1098-T, the totals didn’t add up. After inquiring, I was informed of a “study abroad administrative fee” of $850 and a “study abroad program fee” of $4676, so these are excluded from the total on the 1098-T, because these are considered “nonqualified” by the university.
It is too late to return any money (greater than 60 days), and in the next calendar year.
Any advice? Looks like I am out of luck.
Yes, sadly it’s too late to return overpayments.
My daughter is going to Barcelona through Sae Barcelona. Her credits will all transfer back to her home University. We pay the program not the school. Can we use the 529 to pay ourselves and then pay the program?
If she’s attending a program that’s not accredited or a part of a school that’s on that Federal school code list, then no.
This is very informative. Thank you.
I am a little unsure about whether we can use 529 funds without penalty if my children study overseas for the entirety of their tertiary education (that is, not through a US study abroad program), if the school is listed on the Federal School Code List. For example, if my child enrolls directly at University of New South Wales in Australia for a 3-year degree, which is on the list.
Yes, if the school is listed on the US Federal School Code list, you can withdrawal up to the cost of attendance for qualifying education expenses each year.
Hello,
My son is 4.5 months old and we are wanting to open a 529 account for his future. He is a dual citizen of the USA and Australia. If he wanted to study in Australia when the time comes, if the university or college is on the US Federal School Code list, can he still use his money for a course there? We also plan to move back to Australia in the near future, does this have any affect on how he can use this money?
Thank you
It can definitely affect you. If the school is on the FAFSA school list, you’re fine. If it’s not, and you want to use the money, you’ll have to pay a 10% penalty on the earnings.
Am I able to use 529 funds to pay for my Masters in Canada? I live in Western NY and completed my Bachelors from a state college (SUNY Brockport).
If your school is listed on the Federal School Code list, yes. Only about 100 overseas/out-of-US schools are listed. Here’s the list: Federal school code list.
My daughter is enrolled in a U.S. university. One of her classes is a Music Study class that involves her being in a Select Chorale. She is required to travel overseas for 10 days for study with the Chorale. Would any portion of the trip expenses be considered qualified 529 expenses?
I can’t imagine that this is truly a requirement of the class or university or a requirement for graduation in any way. The rules are here. Travel no. Room and board if required and cannot exceed the cost of attendance.
This is very informative!
Do you know if the same rule applies to the new guideline that allows you to play for K-12 expenses from the 529 plan? In other words, if my child attends a private k-12 school overseas, can I use 529 plans to pay for it?
Yes, but your overseas private school must be a U.S. accredited school. There are only about 100 worldwide outside the USA.
Read this: Using a 529 Plan For Private k-12 Education.
Can I contribute to 529 saving plan as pre-tax amount from my paycheck?
I searched google for a whole day but there is no article kinda answers my question. Thank you
I don’t know of any employers that offer saving in a 529 out of your paycheck.
As for pre-tax, some states offer tax deductions, but there is no Federal tax deduction for 529 plan contributions.
Robert
My daughter has s chance to study over spring break in Greece for a few weeks. After reading the posts, it appears that the tuition, housing and meals can be paid for with 529 money, but I will have to pay for the airfare out of a separate non- 529 account . Is this correct?
If the trip is for college credit, yes – the same rules apply (tuition, room/board, etc). But you’re correct – airfare is your own deal. Same is true for any local transportation needed.
My daughter is doing her entire undergraduate program at a small private university in Germany. The school does not appear on the list. We want to use the funds set aside for her education in the 529 Savings plan. The school meets the preliminary requirements but does not want to accept US subsidies. They held a “loan deferement” status at one point, but it is unclear whether they still do. We are not looking to use US financial aid funds — just the money that was saved through this 529 plan. What programs are available to them/us? How long does it take? Who should we/they call?
If they don’t want to get certified, they don’t have to. You can still use the funds, but you would pay taxes and penalties on earnings since it’s not qualified. You can also NOT use the funds and reassess at a later time – maybe change the beneficiary or your daughter goes to grad school.
My child has dual citizenship in the US and EU and can thus enroll directly at a university in the EU (and not only as part of a study abroad program from a US university). Is it possible to use 529 account funds to pay for expenses related to direct enrollment in a foreign university that has no connection to a US study abroad program?
If the university has a Federal school code, then yes. If not, then no.